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Monday, October 22, 2012

Last update expected that the market was due to turn lower for at least a minor top, and turn lower it did -- however it moved a bit lower than expected, and this has now thrown the intermediate outlook back into the ambiguous zone. This weekend, I've charted more markets than I can count, and wrestled with what to present to readers to try and keep the whole thing reasonably understandable. I finally decided to boil it all down to a simple chart of the S&P 500 (SPX) to avoid confusion. Don't worry, there are plenty more charts coming in this update, but I think it's easiest for readers to focus on the simple message in this chart:

The bottom line is: this is still the intermediate "chop zone" and until the market break down or breaks out, there are multiple options still open -- and the problem I've been running into this weekend is there are simply a lot of mixed messages being thrown off by different markets. I'm going to present a few charts that convey the case for each side -- and maybe the best assumption from this data is that the market may just continue chopping around for a bit longer.

If it does cleanly break through this zone, the losing side might just want to get out of the way until things clarify again.

One of the more bullish charts I studied is the Philadelphia Bank Index (BKX), which, at the moment, sure looks like a fourth wave triangle -- and it's right where you'd expect to find one. Sustained trade beneath the (C) wave low would open up more bearish prospects.

Also still looking bullish is the NYSE Composite (NYA) (continued, next page)

The Volatility Index (VIX) closed outside its upper Bollinger Band on Friday, and this often suggests some type of bottom is close for equities -- though when this signal fails, it can fail in spectacular fashion.

On the bear side, the Dow Jones Transportation Average (TRAN) looks a bit questionable for the bull case, though it's still largely ambiguous... and TRAN has been off it its own world for a while anyway.

Then there's the Russell 2000 (not related to Andre 3000), which probably has to be put in the bear corner for now, though I've labeled the recent decline as a correction. I'm really not sure how all these markets fit together at the moment -- and there are also questions as to how this waveform fits into the bigger picture for RUT.

I also want to publish a quick update on IBM, because it may have broader market implications. On September 19, IBM was trading at 207, and I talked about the fact that there were still no bearish divergences present in the RSI and MACD, and to watch for divergences as a precursor to a top. IBM then went on to make a higher price high as expected, and also formed slight bearish divergences while doing so -- it's interesting to see what's happened since, especially once it crossed my previously-noted "bull warning level." IBM has now reached important long-term channel support.

According to Bespoke Investment Group, when IBM trades down on earnings (as happened on October 16), then over the next 5 weeks the SPX heads lower exactly 70% of the time. Thus it would seem that if IBM can't reverse from current levels, then SPX may be in for some trouble too. Looking at the chart below, if IBM is going to maintain the uptrend, then this would be a great spot for a bounce. Watch this one carefully going forward.

And finally, the big picture bear count has simply refused to die, even though bulls have tried to drive stakes through its heart twice now.

In conclusion, the bottom line is that while the market has been awfully whippy and frustrating from an intermediate perspective (conversely, the short-term updates have hit the last two big turns perfectly), there's still nothing to write home about for bears in the big picture. There's a lot of support in the 1400 area, so if bulls can't turn the market back up here, then that zone will be the next real test. Trade safe.

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